Majestic Research

MarketWatch

Toll's Homebuilding Revenue Falls 22%

By Greg Morcroft and John Spence
Published: February 06, 2008

Toll Brothers Inc. doesn’t see any end in sight to the U.S. housing market’s woes as the luxury homebuilder said Wednesday that first quarter home-construction revenue fell 22% compared to the same period last year.

“The housing market remains very weak in most areas. Based on current traffic and deposits, we are not yet seeing much light at the end of the tunnel,” said Robert Toll, chairman and CEO.

Horsham, Pa.-based Toll also said its backlog fell to $2.4 billion, down 42% from the first quarter of fiscal 2007, as the number of signed contracts on homes fell 46% from last year. In addition, the average price of a house sold by Toll fell, while the average price of canceled houses rose.

Joel Rassman, Toll’s chief financial officer, said in a press release: “With conditions still weak in most markets, we expect to continue to face challenging times ahead. We are still in the midst of finalizing our first-quarter impairment analysis.”

However, he said management currently estimates that write-downs for the latest quarter ended Jan. 31 will be between $150 million and $300 million before taxes. The company will formally report first-quarter financial results on Feb. 27.

John Tomlinson, analyst at Majestic Research, said the impairment-charge estimates were likely higher than most people expected. He said investors were also likely to focus on the 46% order decline. Average prices fell as cancellations rose in the Toll’s higher-priced markets in California, Tomlinson said in an interview Wednesday morning.

Toll’s outlook comes a day after analyst Daniel Oppenheim at Banc of America Securities upgraded the company’s shares to neutral from sell, saying he had a more positive stance on homebuilding stocks due to improving affordability, reduced construction and less risk as adjustable-rate mortgages reset because of lower interest rates.

Toll’s preliminary results were just one bit of a slew of news scheduled out of the homebuilding sector this week.

On Tuesday, Standard Pacific Corp. surprised investors with fourth-quarter results that didn’t turn out as poorly as many had anticipated. In addition, D.R. Horton Inc. and M.D.C. Holdings are scheduled to report results later this week. Investors will also be looking for a report on U.S. pending home sales for December, due out on Thursday.

What will spring business hold?

Tomlinson at Majestic Research said it’s too early to tell yet if the recent rally in home-construction stocks means the worst is behind the battered industry.

“It depends on the spring selling season, but sentiment is still pretty bad out there,” the analyst said.

However, he said federal plans to temporarily raise the limit on conforming loans would particularly help luxury-sector builders such as Toll. The higher selling price means buyers of Toll homes would be more likely to use so-called jumbo loans, which are more expensive and don’t conform to standards set by Fannie Mae and Freddie Mac.

Still, Tomlinson said if raising the loan limit does have an impact, it will take a while to show up in Toll’s orders.

“The latest quarter is seasonally weak, so it’s tough to extrapolate these results,” the analyst said. “Buyer traffic may be rising, but they’re not pulling the trigger quite yet.”